It’s Time to Fix Montana’s Pension System

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April 04, 2013

Editor’s note: The following testimony was delivered by Americans For Prosperity-Montana in support of SB406, “A Referendum to establish a Direct Compensation Retirement Plan for New Hires,” before the Senate State Administration Committee on April 3, 2013. The bill was tabled in Committee and effectively dealing with the challenge of unfunded pensions was further delayed.

The Montana pension system is in a deep financial hole which jeopardizes retirement benefits for all current state retirees and current employees as well. There are three reasons this huge financial hole exists:

During the 2008 recession the DOW dropped from 14,000 down to 7,000 in early 2009. The pension investments dropped from $8.5 billion down to just over $5 billion… a $3.5 billion hole. Sen. Lewis, Sen. Balyeat and others predicted that even a stock market rebound to the 14,000 mark would not fill the financial hole because of the lost years of investment returns. Now 4 years later we are back at DOW 14,000 and their predictions have proven totally true. The lost 4 years of returns have caused the pensions to remain critically unsound.

The 2008 financial crisis was worldwide… and was accompanied by a paradigm shift in outlook…. The old 8% and 7 ½% projected returns are no longer reasonable; especially with the Fed forcing interest rates down near zero to protect the Federal government from an interest payment crisis on the ballooning federal debt.

The old pension system is a dinosaur with so many holes in it that excess unwarranted benefits are often paid out to one retiree at the expense of all the rest of the retirees. In an era when computer technology gives us the capability to easily maintain individualized retirement accounts for each employee and retiree, its fiscal stone-agery to continue pouring everybody’s retirement savings all into one big pot where the early birds out can reap benefits over the course of their retirement years that far exceed the funding paid in during the course of their careers. Some of you who’ve been around here awhile may remember the case back in 2003 when a high level FWP official spiked his salary for 3 years, then retired at age 49… (I have the news story with me for those who want to see it). His calculated total retirement benefits over his remaining life expectancy were projected at around $2 million taken directly from the collective pot containing everybody else’s retirement… This despite the fact that he had paid only about $80,000 into the plan during his career. I want to emphasize that these excess payouts are made not through any illegal acts on the part of the retirees… the system design is at fault. A collective pot without individualized accounts, the ability to retire at 49 years of age in some cases, and the inability for the system to take into account increased life expectancies are all examples of system flaws in our archaic defined benefit plan.

With these 3 strikes against it, it is highly unlikely that any infusion of taxpayer money will significantly help. There are just too many leaks in the system. When the legislature pumped $150,000,000 into the system back in 2003; some legislators predicted back then that this “was pouring money down a rathole” because no significant reforms were made at the time. Those predictions have proven sadly true.

All of these many problems with defined benefit plans are the very reason that most private sector businesses have long since moved away from defined benefit into defined contribution plans. It’s time for Montana government to make that same move into the 21st century with its retirement plans. SB406 is the vehicle to make that move. Consider the benefits:

Under the Defined Contribution plan, each employee would have their own individualized account, totally safe from depletion and insulated from the actions of other employees.

The switch to a DC plan eliminates the leaks and loopholes in the current system… salary spiking, early retirement, etc. You only get the balance in your account (including employer matching and investment earnings), annuitized over your remaining life expectancy.

With the baby boomers retiring and a projected shortage in staffing staring us in the eyes, SB406’s DC plan encourages longevity two ways: 1) the longer you work, the more matching and investment return you get. 2) Because you have your own individualized account, you get the direct benefit from working longer. And the longer you work, the shorter your retirement life expectancy….. so your monthly benefit goes up substantially the longer you work.

But it still gives employees great flexibility if, for whatever reason, they feel they need to retire sooner. Assuming they’re vested, they would still receive their account balance, plus employer match and return, annuitized over their remaining life expectancy.

The remaining plan participants’ retirement is protected… there’s no way to rob from the rest.

Just like in the private sector, the employee gets to individually make investment decisions; and bears individual responsibility for his choices. The taxpayers are no longer left on the hook and at risk to bail out the system every time there is a market downturn.

We now have the computer technology to handle individual accounts, so why not switch to this new plan rather than simply tweak a dinosaur plan with no individual accounting, no safeguards against unwarranted personal gain at the expense of the other participants, and no real direct incentives for longevity… which we desperately need to meet staffing needs beyond the retirement of the baby boomers.

DB plans continuously find themselves underfunded because of increasing life expectancies. This leads to ongoing political fights to raise the retirement age, reduce the benefits, etc. DC plans, conversely, automatically self-adjust to increasing life expectancies. As each employee looks at their own individual retirement account balance, they decide to work longer if necessary to generate a sufficient annuitized retirement benefit.

Because SB406 is a referendum, your passage only puts this measure on the ballot, where there will be plenty of time to thoroughly debate it in the public square; and both sides will be able to make their case over a several month election cycle time period. Let the taxpayers and employees themselves decide this via a vote after a thorough vetting and debate.